Credit insurance: Who needs it?

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The recent announcement by Apple to withdraw from using Imagination Technologies’ chip designs has sent the company into a tailspin; it’s currently looking for buyers. Shoe retailer Brantano has disappeared and Jaeger is being divvied up.

These are just three stories from recent weeks. We are living in turbulent times but opportunity lies in wait for the wise and wary. It is actually possible to grow your business and virtually eliminate bad debt by taking advantage of the crystal ball offered by credit reference agencies.

These agencies provide in-depth reports on the health of your clients and suppliers. They give you a clear idea of the risks you face in doing business with any particular organisation. They dig deeply into a company’s affairs, historical and current. They explore the background of all the directors and other companies they may be involved in. The good agencies are usually able to spot companies in difficulty many months before the symptoms become visible to the outside world. Given that many high-profile company collapses come as a surprise to their customers and suppliers, this is absolutely invaluable intelligence. What’s more, it helps you in other ways, especially when it comes to adjusting the credit term you offer your customers. It might also give you pause if you were in the habit of paying advance to your suppliers.

Good credit reference reports are bankable in other ways. For example, you can get better terms from credit insurers, banks and invoice finance companies At least one insurer will give you a higher discretionary credit limit, leaving you free to make deals quickly without the red tape and delays associated with seeking prior approval. Needless to say, this only applies when you have a reference report that matches or exceeds the value of the credit being extended. You might, for example, have a regular client with a £30k/30-day credit limit and discover that you could safely increase this to £100k. The insurance company would cover this with the result that your company and your client would both benefit from the subsequent growth in business.

Some companies prefer to sidestep the credit insurance facility and self-insure. Maybe their history has pushed their premiums up to an unaffordable level. Or maybe they just think they can do better taking the risk themselves. In the light of the unpredictability of today’s markets, this is a brave course of action but they would greatly increase their confidence and improve their security by getting credit reference reports on the clients and suppliers that would expose them to the greatest risk were they to collapse or default on their payments or supplies. Perhaps just as importantly, they would have a much clearer idea of the credit-worthiness of their clients and be able to embark confidently on business expansion with the right ones.

Companies in different markets are exposed to greater or lesser risks dependent, in part, on their profit margins. The clothing retail industry operates on notoriously thin margins and it’s easy to get into trouble. They often buy from China, India or Bangladesh and sell into the European market. A supply disruption can echo all the way along the chain, breaking deals and leaving the shelves empty. A large client, a shopping chain perhaps, which fails could leave large unpaid debts and an embarrassment of stock with the wholesaler. Again, the repercussions are felt along the chain. Two strategies would help: one is not to become too dependent on a single supplier or client and the other is to monitor the health of all your major suppliers and clients through a professional credit reference agency. The third strategy, the belt and braces option, would be to secure credit insurance as well.

But business life isn’t all about protecting the downside; it’s about having a solid strategy for maintaining or improving your market share, your growth and your margins. A key element in all of this that you choose the right clients and suppliers. Common sense dictates that your company shouldn’t become overly dependent on one client or supplier ­­– you can do your best, but a change of management could still result in them taking their business elsewhere. The Apple/Imagination Technologies story from earlier is a classic in this respect.

A combination of credit reference and credit insurance will give you the ability to swim against the tide. They will give you the confidence to make good decisions about your relationships with customers and suppliers. And, even if you were to drop the credit insurance element, you’d still be a lot better off than relying on instinct and conventional references.

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